Monday, October 12, 2015

Turning $10,000 into $1Million in Forex

Parts one and two of a series of articles explaining how to give yourself a realistic chance of turning $10,000 into $1 million by trading Forex. Here I covered the topics of how long it might take, money management, trading strategies, back testing, forward testing, and identifying of the series, I am going to explain how to determine which curete trading strategy that will give you a realistic change of turning $10,000.

How to Decide Which Currency to Trade

Two approaches that can be taken in deciding which currency pairs to trade at any given time.

a diversified universe of currency pairs, and trade them all according to the entry and exit rules of your trading strategy. For example, you might take the seven major global currencies and put ally correlated currency pairs at any given time. I address this issue below in How to Control Risk. Below is a sample equity curve achieved over the past 6 years.

Is to take the same diversified universe of currency pairs, but only trade the ones that have the strongest momentum. This is known as “best of” momentum. For example, assuming you take the universe of 28 currency pairs I mentioned above, you could check each weekend to set is hot in the market. The major disadvantage is tquite long periods entering too late in the moves to make any profit, while missing out on the starts of any new, sudden directional moves. Below is a sample equity curve achieved over the past 6 years by this type.

How to Control Risk

To have too many trades open at any one time, especially in currency pairs that are highly positively correlated, and especially if you are trading a universe of currency pairs without any kind of “ example, you might say no more than 12 trades open at any time, no more than 8 trades open in highly positively correlated currencies (e.g. NZD and AUD, or EUR and GBP), no more than 6 trades open in the same direction for any single currency. It might seem that these rules are restrictive, especially when there is a strong move, but these restrictions are beneficial to profits in the long-term. It is y signal you get turns out to be the best trade in any case. Do not forget that you can always close some of an existing trade that is in profit and open a trade in one of the later signals if you really want to. The important thing is to keep a limit on your risk.

is an additional element to risk: the risk of a sudden huge movement in a currency, such as happened with the Swiss Franc in January 2015. Such events are rare, but in these events stop losses can be completely useless. As an additional precaution to control your overall risk, you should avoid trading any curren against another currency imposed by their central bank.

Advanced Exit Strategies

Exits are very difficult to get right. In a sense there is no “right” exit as no matter how skilled a trader you are, you will usually not be able to exit a trade at exactly the right time.

One of the most robust exit strategies you can use is a combination of deciding a minimum profit target, and then watching the price action once the target is hit. After the target is hit, watch for a failure to make a new high (in a long trade) or low (in a short trade).

An example is shown in the chart below. Say a long trade is made where the up arrow is placed towards the left. A major high is made where “1st High” is marked. There is then a deep pull back, and then at aro takes some practice to identify major highs and lows, so I recommend practicing this technique with historical unseen price.